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CANDY CROWLEY, HOST: Take two for the White House this Sunday. A short time ago, President Obama delivered an address to a pro-Israel lobbying group hoping to relieve tension between the U.S. and Israel.

The White House refigured the long-planned AIPAC speech in the wake of Thursday's State Department address in which the president called for Israel-Palestinian negotiations based on pre-1967 borders.

It angered many Israelis, their U.S. supporters, and led to a more awkward than usual photo-op Friday in the Oval Office between two men never at ease with one another, President Obama and Israeli Prime Minister Benjamin Netanyahu.

Did President Obama's message today strike the right tone?

(BEGIN VIDEOTAPE)

CROWLEY (voice over): Today, the president tries to calm the waters. Reaction from Israel's ambassador to the U.S. Michael Oren, and then from the chief Palestinian representative to the U.S., Maen Areikat, and analysis from former Congresswoman Jane Harman and former Bush adviser Stephen Hadley.

(END VIDEOTAPE)

I'm Candy Crowley, and this is "State of the Union."

In his speech to the American-Israel Public Affairs Committee, President Obama addressed the controversy from his Thursday speech.

(BEGIN VIDEO CLIP)

PRESIDENT BARACK OBAMA: And it was my reference to the 1967 lines with mutually agreed swaps that received the lion's share of the attention, including just now.

And since my position has been misrepresented several times, let me reaffirm what 1967 lines with mutually agreed swaps means. By definition, it means that the parties themselves, Israelis and Palestinians, will negotiate a border that is different than the one that existed on June 4th, 1967.

(APPLAUSE)

That's what mutually agreed-upon swaps means. (APPLAUSE)

It is a well-known formula to all who have worked on this issue for a generation. It allows the parties themselves to account for the changes that have taken place over the last 44 years.

(APPLAUSE)

It allows the parties themselves to take account of those changes, including the new demographic realities on the ground and the needs of both sides. The ultimate goal is two states for two people.

(END VIDEO CLIP)

CROWLEY: Joining me now here in Washington, former California Congresswoman Jane Harman, who is now president and CEO at the Woodrow Wilson Center, and former national security adviser Stephen Hadley.

We also want to tell our viewers that we will sit down with the U.S. ambassador -- the ambassador from Israel to the U.S., as well as the Palestinian representative to the U.S., as soon as they touch base with their homes just to get the general reaction from their governments there.

But we want to start with you all, who know this area and this region and this decades-long, you know, confrontation there. Did the president hit the right pitch?

HADLEY: I think he did. He -- he started out by reaffirming America's commitment to Israel's security, basically said it was ironclad; it was unbreakable. He talked about Iran and set a very high bar that we will prevent Iran from having nuclear weapons.

And then he talked about opposing efforts to delegitimize Israel. And then, as your -- as your viewers just saw, he clarified some points that were left ambiguous in his speech in a way, I think, that gave real reassurance to -- to Israel. So I think he -- I think he framed it up just right.

CROWLEY: He did. And I think some of that reassurance, when we heard especially that last part of the language, about taking into account the new demographics, which you could read a couple of ways, but that's basically the language from the Bush administration, is it not?

HADLEY: That's right. It's code -- "the new demographic realities" is code for the major existing settlement blocks on the border between Israel and the West Bank that Israelis understand need to be part of a final state of Israel and a final negotiation.

And, secondly, he accompanied that with the recognition that, where you start with the '67 lines, you're not going to end up at the '67 lines. And, of course, that's what -- what Prime Minister Netanyahu said very clearly. He could not go back to the '67 lines. They were indefensible. They did not take into account these demographic realities, and the president basically said, I understand; I'm not asking you to go back to the '67 lines. You, the parties will negotiate a different order.

CROWLEY: And should Israel look at this speech in its totality and go, OK?

HARMAN: I think so. I do think so. I think the controversy over Thursday's speech was overblown. I don't think there was as much of a difference as was played in the press and, frankly, as some on each side claimed there was.

And what I liked about today was there is a new -- newly confident President Obama -- maybe this comes after the Obama -- Osama bin Laden takedown, but, at any rate, he was cool in an audience which, in some circumstances, might have thrown tomatoes at him after Thursday but which actually cheered him numerous times.

That was set up, I think extremely effectively, by Lee Rosenberg, who's the president of AIPAC and a longtime Obama supporter from Chicago.

But let me make one more point, Candy. The facts on the ground have changed, even since the Bush administration. They've changed a lot, as President Obama's pointing out.

There will be probably new governments in many of the neighbors surrounding Israel. Both Turkey and Egypt, longtime supporters of Israel, are now decidedly cool about Israel. Iran is as hard-line as always and has armed its proxies, Hezbollah and Hamas, surrounding Israel.

And the final thing is, with this youth bulge, with the -- as the president said, with the enormous increase in Arab populations west of Jordan, inside the contours of Israel now, this is untenable that Israel can remain a Jewish state unless -- unless something is done to redesign a two-state...

CROWLEY: And that -- that, to me, if there was an underlying text to this, it reminded me of the president's campaign in his constant repetition of a phrase from Martin Luther King, "the fierce urgency of now."

He almost said, this is the same policy that we have talked about in private, sometimes in public, but the game has completely changed. And the message seems to be, Israel, if you do not act now, you will be further isolated, that the game is changing in a way that it will isolate you. Did you get that from it?

HADLEY: He's very concerned about that. And he said that one of the things that has changed is this effort to delegitimize Israel, a frustration that the negotiations which seem to have been under way for two decades have not led anywhere and that that is what is causing the international community to turn to forums like the United Nations.

You know, he -- he said the point the status quo is unsustainable; we need to show that negotiations can work. He did two other things. He said that it is not just Israel that needs to do something. He called for the Palestinians to take some action, and he called for the countries in the region to take some action.

And the second thing he did is he changed the subject. We're talking now not about the issue of settlement freeze. We're talking about the terms for peace. That was very important to do, to turn the corner on this settlement freeze debate, which really has not been a productive vehicle for advancing...

(CROSSTALK)

HARMAN: And I'd add a couple of other things. He made it absolutely clear that the U.S. will never support these efforts to delegitimize Israel. He listed all the ways in which we have opposed them in the past and vetoed things at the U.N. But he said we will not change.

But he then urged Israel to be more forward-leaning. He quoted the Talmud. And I think that Bibi Netanyahu has an opportunity here to play a peacemaker role and perhaps to broaden his coalition.

I would think that the Kadima Party, in the center, Tzipi Livni and others, might join him if he welcomed them back in. And that would make up for any defections on the right.

This is a huge opportunity, as President Obama said, both for him and for President Abbas of Palestine, to move forward and drop some of the old baggage.

CROWLEY: And -- and in this speech, did we hear anything that, if you are a Palestinian -- obviously that means different things to different people, certainly in terms of Hamas and Fatah -- but did you hear something that you thought, this is good that he said that?

HADLEY: Well, I think the speech that he gave on Thursday was in some sense weighted towards the Palestinian side. And I think what he did today was correct the balance a little bit and answer some of the concerns that the Israelis have.

But, you know, the Palestinians have to show that they're in a position of being able to accept a settlement proposal. You know, a -- a peace proposal was made to Arafat. It was made to President Abbas. They've had two. They've rejected them both. So the burden on the Palestinians is to show that actually they are prepared to sit down at some point and negotiate the peace.

CROWLEY: I'm going to stop you two here. You're coming back later in the show.

But up next, we want to get reaction on the president's Middle East speech from the PLO's chief Palestinian representative to the United States.

(COMMERCIAL BREAK) CROWLEY: We are back. And fortunately, I was able to corral former California Congresswoman Jane Harman and former national security adviser Steven Hadley to actually sit back down again as we await reaction from both the Palestinian and the Israeli side. So, first of all, with the speech in general and back to that kind of fierce urgency, it was always my feeling that when all of this, the Arab Spring started, that there were two factions in Israel, those who said if we're going to make peace we have to do it now, because before everything changes. And others who say we can't make peace with Palestinians because we don't know what the horizon's going to look like.

What wins there?

Clearly the president, by the way, is on the side of now.

HARMAN: Yeah. Well, I'm on side of now, too. And I think the moral interests of the U.S. are on the side of now in terms of this whole changed landscape. I mean, think about it. If everywhere else in the Middle East the voices of the public are rising up in these new democratically societies emerging, we hope. I mean, there is a fear they could intolerant and there are crackdowns on religious minorities all around, which is a bad thing. But if the voice of the people will really be paramount, it is important that if Israel wants to be a Jewish state, that Israel help make the hard choices to draw the right lines, mutually agreed lines, and settle the other issues, which are even more contentious than the lines, the future of Jerusalem and the so-called right of return, which the president suggested, in my view wisely, be put as stage two of the permanent negotiations. I think that's smart.

But at any rate, I'm strongly in favor of that. And I just would just want to disagree once with my friend Steve Hadley. He used the word "balance." He said that the president's speech on Thursday was perhaps too far in the Palestinian direction and it needed to be rebalanced today before AIPAC.

I thought that the president's speech on Thursday was a very good speech and the word "balance" kind of makes me break out in hives. He addressed both sides of this, and he also addressed the broader context. And he said very clearly that the U.S. will be on the right side of history as these governments change, and I applaud him for doing that and sticking to his guns.

HADLEY: I think it is a good speech. I think it is a balanced approach. I think the real problem is going forward. One, can we avoid violence from breaking out in the West Bank. And that means having a prospect for negotiations and also continuing the progress on the ground that Prime Minister Salam Fayyad has been doing to show the Palestinians that a peaceful, democratic, secure state can emerge.

Then we've got to see of the politics in the Palestinian/Israeli side, because the problem is the politics in both communities is not yet conducive to getting them back to the table.

Then we've got to get past this September event at the U.N. Can we use it to ...

CROWLEY: At the U.N. when we expect the Palestinians to ask the U.N. to declare them... HADLEY: Right.

CROWLEY: ...a state.

HALEY: That approach is going to make peace harder. Can we somehow, through diplomacy, change September so it actually makes it more possible to have negotiations? And then the problem after that, of course, is the prospect of Palestinian elections in May and uncertainties about Israeli politics.

So in some sense, the problem is not the terms of the peace. The president talked about that. A lot of that is known. The problem is how to get from here to there into a negotiation. And it does not look really...

CROWLEY: That's what I was going to ask. I mean, for all of this renewed focus since Thursday on the Middle East peace process, it has been moribund for, you know, several years.

HARMAN: That's right.

CROWLEY: Let's face it. Has the president been active enough? Because everyone I've talked to say if this is going to get done, he has to be out there and push and push and push. And this is a guy who knows full well that here at home he needs to be doing something about jobs. Has me been active enough?

HARMAN: I would say no. But I think with this speech and with saying today very clearly that this is a very high priority for him, he will become more active.

And my suggestion, Steve, is if we don't want this vote in September, let's hope and help the parties to move before September to jump-start these negotiations and focus on some real progress, which I think will change the dynamic at the U.N. in September. I mean, why recognize a state and do something in a very polarizing way when negotiations restarted?

One other thing we haven't put on the table, Candy, and that is Hamas. The president was clear today, I thought he was clear Thursday, too, that Hamas must renounce violence and agree to recognize Israel as a Jewish state if it's going to be dealt with as part of the new Palestinian government. And that hasn't happened. And that is something that President Abbas needs to help deliver since he was the guy who decided he was going to broaden his coalition.

CROWLEY: Let me ask you to -- we want to pick up on several of those points. We want to take a quick break here. More coverage of the president's Middle East speech ahead.

CROWLEY: And we believe we will have the Palestinian representative to the--

(COMMERCIAL BREAK)

CROWLEY: Welcome back to State of the Union. We're discussing the president's speech this morning to AIPAC, the American-Israel Public Affairs Committee.

We will have on, I am told, the Palestinian representative to the U.S., who will be here to react.

First, we've had some back and forth as you might have noticed. We also expect to have the Israeli -- used to expect to have the Israeli ambassador. He's trying to talk to people back home so he's since left.

But we are working this all out. And I have to tell you, thank you for still being here, Stephen Hadley and Jane Harman, that to me this just says it all because everything is so difficult.

HARMAN: I agree. We were chatting with Ambassador Orrin in the green room before the show, and he reminded me that not only is the prime minister speaking to AIPAC tomorrow night, so he will have an opportunity to expand on this, but he's also delivering an address to the joint session of congress on Tuesday where it was predicted that he will offer some big ideas.

And I'm very excited to hear that. I think he's an enormously capable man and capable of big thoughts, and Ambassador Orrin represents him very well in this capital.

But my point is that there season time to waste, that now is -- that the urgency of now is now, and that this is the time for Israel and Palestine to put their best case out not of prior grievances but of future vision for shared geography.

CROWLEY: Let me ask you, this -- I think you agree this may be the time, as well, but do you think Prime Minister Netanyahu is the man?

HADLEY: He is the man in that he is the prime minister of Israel, and he is the person we can, should, and will be dealing with. But I think it shows you the problem in a way. It's good that we're talking about the terms of a peace, but in some sense that may turn out to be the easiest problem.

The politics on the Israeli side and the Palestinian side is very difficult. The politics of getting them back to the table is really the challenge that the administration is going to have going forward.

And I think it's going to require two things. One, a real effort to develop and strengthen trust between the United States and the Israelis, trust between the United States and the Palestinians. And secondly, there's an issue of who is going to lead this process. Senator Mitchell has resigned. And I think one of the questions for the administration is going to be whether Secretary of State Hillary Clinton is really going to step forward now and take this as part of her brief.

In the end of the day, it is peace making in the Middle East is presidential business, and it's going to have to be President Obama. But he's going to need an agent in this process. And one of the questions really is, with the Mitchell resignation, who's that going to be? And i think it's probably going to have to be secretary of state.

HARMAN: He, though, has a strong team on Israel. He mentioned this morning Dan Shapiro, who has been his White House aide, who's moving to Israel as ambassador, so when he's confirmed, he will have a very new, strong ambassador to Egypt, who I'm not sure has been nominated yet but I believe she has, Ann Patterson who comes out of Pakistan. And my guess is that the folks on ground there can do more.

Let me make one other point that's a good news story. Salam Fayyad of the Palestinian Authority has done an amazing job of standing up a Palestinian security force with our support and the support of the Jordanians. It's well trained. It's keeping peace in the West Bank. And economic development there is at record levels in the last several years. People don't know that story.

And I think Palestine is in much better shape with leadership from President Abbas to embrace this moment. And I think the same is true, really, of Israel. And I suggested that the coalition might change for Bibi Netanyahu, but I think there's an opportunity to do what a majority of Israelis want, which is move toward a two-state solution and a Jewish state of Israel with secure borders that the United States has already sworn many times to help Israel protect.

CROWLEY: Let me put the two of you on hold here for a second because we have to take another break. And when we come back, Palestinian representative to the U.S. Maen Areikat joins us.

(COMMERCIAL BREAK)

CROWLEY: Joining me now, the chief Palestinian representative to United States, Maen Areikat. Thanks for being here. We appreciate it.

AREIKAT: Thank you.

CROWLEY: Let me first just your general impressions of this speech.

AREIKAT: Well, I think it once again represents the commitment of the president and the administration to pursue peace between the Palestinians and the Israelis. The Palestinian leadership highly appreciates the continued commitment shown by the president on Thursday and today, And we hope that the administration will be able to translate this genuine desire to end the conflict to some practical steps.

CROWLEY: And let me, I want to play you something you said, because I want to ask you where the Palestinians stand on certain things that the president said. And the first one is about Fatah and Hamas. So this is what he had to say.

(BEGIN VIDEO CLIP) OBAMA: The recent agreement between Fatah and Hamas poses an enormous obstacle to peace. No country can be expected to negotiate with a terrorist organization sworn to its destruction.

(END VIDEO CLIP)

CROWLEY: What's the way around this, then?

AREIKAT: Well, first of all, the reconciliation agreement that was signed on May 4th in Cairo.

CROWLEY: Between just a -- just to let our viewers know, between Fatah and Hamas. And Hamas, we should say, the United States and Israel and others consider Hamas to be a terrorist organization and they say that until Hamas recognizes Israel's right to exist and eschews violence, that Israel will not deal with them.

So you have made a May agreement with Hamas.

AREIKAT: Right. The May agreement did not call for the creation of a national unity government as many have been saying here in this country. It calls specifically for the formation of an independent technocrat government that will prepare for national elections in May 2012 and help in the rebuilding of the Gaza Strip.

The PLO, under the chairmanship of President Abbas, will continue to be in charge of the negotiation with Israel and of the political fight. So there is not going to be any changes in the course or offices of the PLO and the Palestinian authority until those elections are held in May 2012.

CROWLEY: But it looks as though that with this agreement, that Hamas would have influence on the these negotiations. Would -- if you have -- you know, we all know that when people make alliances, those alliances make differences in policy.

So it seems from the Israeli point of view, as I understand it, that this is an alliance that the U.S. and Israel cannot deal with.

AREIKAT: I think that's why we are calling for the elections. We want the Palestinian people to choose their leaders and their representatives in May 2012.

You know, this democratic process has been held hostage to the divisions between Fatah and Hamas. It is time to allow the Palestinian people to choose their representatives. And hopefully come May 2012, the Palestinians will be able to choose those representatives who will continue to advocate a peaceful resolution with the conflict with Israel.

The PLO has committed itself to a negotiated settlement with Israel.

AREIKAT: Has recognized Israel in the past. And, once Hamas joins the PLO, it will be a faction within the PLO. It doesn't mean that they will be the predominant voice among the other PLO factions. CROWLEY: Right. But it would be a voice, if they were elected in an integral government?

AREIKAT: And this is a democratic choice. The Palestinian people have to make that choice in the elections of May 2012. Before we reconciled with Hamas, Israel used the pretext of Palestinian divisions to say, who should we talk to, the government of the West Bank or the government of the Gaza Strip?

Now, after we united, or we are planning to become a united voice, which I think will be a positive factor in helping the Palestinians reach a historical agreement with Israel to end the conflict and end all claims.

CROWLEY: Would the PLO urge Hamas to reject violence and to agree that Israel should be recognized?

AREIKAT: We have been doing that. We -- I mean, that's one...

CROWLEY: As a condition?

AREIKAT: We have been doing that for the last few years. That was a big reason why we had reached the stage that we reached a few years ago, the division, because we did not agree to their tactics in realizing the Palestinian national objectives.

Secondly, ever since that agreement has been signed to reconcile, we have seen and heard more pragmatic, practical, moderate statements coming out from Hamas leaders. Now, we have to see how much they will shift to adopt the overall PLO policy.

CROWLEY: September turns out to be another kind of watermark in the Middle East peace process. And I want to play something that President Obama said about what we expect to be Palestinian push in the U.N. this September to be recognized as a state.

And here's what the president had to say.

(BEGIN VIDEO CLIP)

OBAMA: No vote at the United Nations will ever create an independent Palestinian state... (APPLAUSE)

... and the United States will stand up against efforts to single Israel out at the United Nations or in any international forum.

(APPLAUSE)

CROWLEY: So I take that to mean, I think, that the United States would not go for -- and, indeed, the president has been saying this is not a good idea because simply declaring that Palestine is a state does not make it so on the ground. Why exacerbate the situation?

AREIKAT: Well, let me -- let me clarify two points. One, we are not in the business of delegitimizing Israel. On the contrary, we have recognized Israel in 1988, 1993, '96, '98, unequivocally. We are in the business of legitimizing a Palestinian state. We don't want to cancel any state out. We want to put a new state on the path, which is a state of Palestine.

And this is exactly what President Obama said last year at the General Assembly. He said, when we go back this year, hopefully we will see a new member state, the state of Palestine.

Secondly, the Palestinians are not saying that this is our only option. We have said repeatedly that -- President Abbas has said repeatedly that, if the atmosphere is conducive to a genuine resumption of negotiations based on real terms of reference, time frame, end game, which to us is the end of the military occupation, the Israeli military occupation, the establishment of the Palestinian state, the Palestinians are willing to engage.

So it's not the only option available to us. We prefer to continue the political process. But as the president also alluded in his speech, he said that the Palestinians are going to the U.N. with the support of the international community out of frustration and impatience that this bilateral process did not produce anything. What we have seen, increase in settlements, increase of facts on the ground, and the hope for peace is becoming more remote.

CROWLEY: So you would -- you could see a circumstance under which that U.N. effort could be delayed if you saw something -- if somehow, on the ground, you saw real action toward a process?

AREIKAT: Absolutely. We need -- we need to see measures and steps on the part of the Israelis that they are genuine and sincere about ending the conflict with us. Instead -- instead of nationalist ideological slogans, we need to replace that with a genuine search for peace and an end to the conflict in the region.

CROWLEY: And, finally -- I've got about 30 seconds, and I want to know, when you look at the unrest that is going across the Middle East now, how do you think that has either helped or hurt the Palestinian cause?

AREIKAT: Well, I think we are watching that closely. It's very interesting what is happening in the Arab countries. On the part of the Arab nation, the Arab people, support for the Palestinian people is very strong.

If we can expect anything as a result of that, I think we should expect more support, more sympathy from the different Arab peoples for the Palestinian cause.

CROWLEY: Maen Areikat, U.S. Palestinian representative to the U.S., thank you so much for coming by. We appreciate it.

AREIKAT: Thank you very much.

CROWLEY: We also want to remind our audience that we did invite the Israeli ambassador to the U.S. to come. Unfortunately, he was unable to join us. Up next, we turn to presidential politics. Mitch Daniels is out. Herman Cain is in. Tim Pawlenty is all set to announce tomorrow. The latest on the race with former House majority leader Dick Armey, former White House insider Ron Klain.

(COMMERCIAL BREAK)

CROWLEY: Joining me now, Ron Klain, former chief of staff for Vice President Joe Biden, and Dick Armey, former Republican House majority leader.

Thank you both for being here.

So we've had some activity in 2012. Newt Gingrich, who we'll talk about a little bit later, had a not very good week. But most recently, Mitch Daniels, overnight, sent a letter out. He -- governor of Indiana -- saying, you know what, just my family -- it can't take it.

Any -- does that move the race in my way, shape, or form? We'll start with you, Congressman.

ARMEY: Well, it's certainly a big disappointment. There were a lot of us that were talking to Mitch and trying to get him to take this race on. My wife and I spent a good afternoon with him. And we -- you know, we have about 2 million activists across the country, and frankly, we're disappointed. Now, obviously, we'll have to start looking, and I was just saying this morning maybe it's time to start drafting Paul Ryan.

CROWLEY: Oh, my goodness. Well, there -- there certainly are a lot of concerns, we should say, that you have been heavily involved in the Tea Party movement and come from, sort of, that section of the party.

Let me ask you, when the White House looks at this sort of thing, is this now background noise, or do they look and say, boy, Mitch Daniels, I mean, he's got a record, pretty good record in Indiana if you're a Republican. Is this a plus or a minus for Republicans? KLAIN: Well, Candy, last time I worked at the White House in the Clinton years in 1996, we were certain that Lamar Alexander was going to be the impossible lead Republican nominee. So I think at the White House you have to be very careful not to worry too much about the other party's nominating process. You focus on what you control, which is what the president's doing, building his campaign, reconnecting with the grassroots, activating those donors, doing the things he needs to be a good candidate in 2012.

And the Republican primary process is just going to work out how it works out.

CROWLEY: And which -- since you brought this up, let me just interject here in the money chase at this point. The president has been out doing a lot of fund-raising, and the numbers are out. And the RNC has raised only about half as much money as the DNC. Does that worry you in any way, shape, or form, when you try to rev up the grassroots?

ARMEY: No actually, you know, in the grassroots movement we have a saying -- hard work beats daddy's money. You have a good activist, energetic activist group, you're much better off than money. And frankly my observation over all the years I've been involved is politicians waste money on campaigns even as viciously as they do in governance.

So quite frankly, they're better candidates if they have less money, because that compels them to go out and work like real people.

CROWLEY: On the other hand, you want to be the person with the most money.

KLAIN: Well look, I think it largely depends on where the money comes from. And I think in the case of the Obama campaign in 2008 and again in 2012 it's going to be a grassroots movement. It's a grassroots movement of volunteers, it's small dollar donors, of activists, of people really connecting and moving voters.

It's going to be a tough campaign. I think the president goes into it very, very strong. He's done a great job. But it's a very closely divided country. It was a closer campaign than people remember it being in 2008. And I think it's going to be a hard fight in 2012. And there's no one in the White House who takes that for granted and no one in the White House who thinks this is a cakewalk.

CROWLEY: Let me ask you about Jon Huntsman. He's the new kind of flavor of the week, because he's -- everybody is sort of -- a lot of talk act how Republicans look at the circle of folks that they know are going to get in and they are not satisfied.

Jon Huntsman is now toying with it. I noted that he is going to have lunch with the George H.W. Bushes in Kennebunkport -- Bush the father. Does that help him or hurt him with folks in your circles?

ARMEY: In our circles having lunch with George H.W. Bush probably is a matter of little notice. Had he been having lunch with George W. Bush, who initiated TARP and some of the things that really got the blood boiling among our activists, I think it would be severely noticed.

Jon Huntsman, we don't know him well, but we do know that he has a bit of a record of supporting things like TARP and so forth. And that's going to always be problematic with our activists.

CROWLEY: Does it hurting that he worked for President Obama as ambassador to China?

ARMEY: No, I would think most people would understand that, at the point he made when the president of the United States called upon him to serve, serve in a foreign -- he was just in Washington, I thought a very good discussion on foreign policy. And the thing that struck me was absolutely zero politics, domestic politics in the discussion. So I think our folks are sophisticated enough to understand that you rise above politics when you're dealing on behalf of your country internationally.

CROWLEY: Let me turn you to Newt Gingrich, because he had such a flamingly awful week.

KLAIN: Yeah.

CROWLEY: Having seemed to have just -- almost every Republican in the House who voted for the Ryan budget, Gingrich seemed to go, no, very bad idea, particularly the Medicare part. I want to get into a longer discussion about the Medicare, but how bad a week did Newt Gingrich have?

KLAIN: Well, I think Newt Gingrich had a bad week. I think the Republican Party had a horrible week. As his campaign was definitely set back by a lot of this noise at the front end. But what you saw was there's a litmus test now in the Republican Party. You have to be, for taking apart Medicare to run for president. And if that is going to be the enforced position of the Republican Party on their candidates in 2012, I think they're going you have to a very, very tough campaign.

CROWLEY: I want to pick up on idea of a litmus test right after we take a break. And when we come back, how the Medicare fight will impact the 2012 race.

(COMMERCIAL BREAK)

CROWLEY: We are back with former Biden chief of staff Ron Klain and former Republican House majority leader Dick Armey.

I want to wrap up 2012 in this way. There is this great movement now, oh, there's nobody good in the Republican race. And you, by mentioning Paul Ryan, seem to be among those, that you're not happy right now with the folks who are flirting with or who have already gone into the race.

ARMEY: Well, we've seen some signs particularly in Governor Pawlenty that he's willing to step up. We understand the fiscal crisis this nation and this nation's government faces is so acute that somebody's got the stand up and take on the big issues. Paul Ryan has done that. He's taken a ton of abuse for having the courage to do so even from within his own party. But, you know, I have said for years on, for example, the subject of Medicare. It's always a debate that's governed by Republicans that don't dare and Democrats that don't care. And at least now we have a Republican that dares.

He needs to be applauded, encouraged, and his work needs to be appreciated as serious professional work.

CROWLEY: I want to ask a button-up question, then back to Medicare. And my button-up question is, take off your Joe Biden Democratic hat. Is President Obama beatable as far as you're concerned? Is there a vulnerability there that should bring in big Republican names?

KLAIN: Well, I think he's going to win. And, you know, anything can happen in politics, of course, but I think you look at his record, you look at his skill as a candidate, you look at what he's accomplished as our president. You look at what he's inherited, where he's brought this country, I think President Obama is going to be re- elected.

But I do know as I said before, no one in the White House takes it for granted. It's going to be a hard campaign. And he's going to have to go out and win it.

CROWLEY: And where is the biggest vulnerability, do you think, for President Obama?

ARMEY: President Obama, we now know it -- I mean, he right now he stands on this ground. Fool me once, shame on you. Fool me twice, shame on me.

We now know who he is. And I don't think you can sell President Obama knowing who he is to this country a second time. I just don't believe he's...

CROWLEY: And yet we see poll after poll that shows despite the fact that people think the economy is on the wrong track, who do they blame? They blame George Bush. They don't blame President Obama. His approval rating is still about 50 percent. Why is that?

KLAIN: Well, as it should be. I mean, the president's created 2 million new jobs in the past 14 months, created more jobs a month than President Bush ever had. You know, he's turned the economy around.

He inherited a horrible, horrible problem. And he's made tremendous progress on the economy, tremendous progress on jobs, tremendous progress on foreign policy. You know, I think that's what voters see.

It's a tough time in the world. It's a tough time at home. But the president is doing the right things.

KLAIN: And, by contrast, the Republicans are embracing novel and bizarre economic doctrines. Ben Smith had a great piece in Politico this week about...

(LAUGHTER)

... the -- the incoming Republican candidate Tim Pawlenty talking about taking us back to the gold standard. I mean, you know, when you compare that to what the president's doing, I think that's -- that's a good place for Democrats to be.

CROWLEY: Let me sum up your -- one response I think you'll have, which is the president has spent way too much money for very few jobs.

And turning to the Medicare question, and that is the Democrats are keen on making Paul Ryan's Medicare proposal, which is to turn -- to subsidize people's, seniors', health care and let them go out into the private market and buy their own, that Democrats are just determined to make that a campaign issue because it's such a killer with seniors. Why -- why isn't that a campaign issue?

ARMEY: Well, with the Democrats, first of all, it's all about let's preserve that big-government program that keeps voting constituencies in our -- in our camp. With Paul Ryan, it's about how do we get better health care for the American people?

Clearly, the best source of health care insurance is the private sector of the economy. And what Paul Ryan is saying, let's let everybody at all ages be free to choose to get -- acquire their insurance or continue their insurance in the private sector.

Medicare was born with coercions and prohibitions that forced people into the public health care system, Medicare, that didn't need to be. I'm a perfect example. I'm perfectly capable of having my own health -- health insurance, that which I've had all my life, except, like everybody else at the age of 65, the government -- the law says I -- the insurer can no longer insure me as he did when I was 64. That's -- that's...

CROWLEY: Because you have Medicare?

ARMEY: That's against my personal liberty, as well as loading the government up with all kinds of liabilities that they can't afford and will never be able to fulfill.

Paul Ryan is doing more to save grandma's health care than anybody I know right now because Medicare is going to go bust and bring the government to going bust if it's not attended to. And he ought to be applauded.

CROWLEY: And all -- all the figures do show that Medicare is killing us and that it's just -- it just exponentially grows. So it is a -- it is a suggestion, at any rate, other than, you know, let's get rid of fraud and abuse.

KLAIN: Well, first of all, I don't think giving seniors the freedom to lose their Medicare is the freedom they want. And I think that the Ryan plan, the Ryan budget, which gets rid of Medicare, turns it into a voucher, and then gives $1 trillion in tax breaks to the wealthiest Americans is any form of courage at all.

It's just a choice to take money away from middle-class seniors and give it to the wealthy.

Now, look, Medicare has worked in this country for 50 years. The idea that now we need to get rid of it and replace it and send people off into the private sector, that's a big mistake. And one other thing about the Ryan budget -- you know, my friend Dick Armey here, he at least had the courage to touch defense spending. Paul Ryan's budget doesn't even touch defense spending. It's just a series of choices, a series of hard-right choices to push the country in the wrong direction. CROWLEY: In our final moments here, Congressman, has this proposal for Medicare become a litmus test? It totally blew up Newt Gingrich's week when he seemed to be against it. Is it now the litmus test for I'm going -- we're going to support you or we're not?

ARMEY: No. What blew up on Newt Gingrich was, first of all, he assailed Paul Ryan, the only standing hero that the grassroots America has. And secondly, he came back again for mandate. People don't want the government to tell them, you must do this, especially...

CROWLEY: Litmus test or no? I gotta get a quick yes or no from you.

ARMEY: OK. No, it's not a litmus test.

CROWLEY: OK. All right. Thank you so much. Congressman Dick Armey, Ron Klain, thank you both so much for joining us.

ARMEY: Thank you.

KLAIN: Thanks for having us.

CROWLEY: Up next, our State Department senior producer, Elise Labott, is standing by to explain some of the delicate diplomatic challenges we faced on this program.

(COMMERCIAL BREAK)

CROWLEY: Joining me now is Elise Labott, CNN's senior State Department producer. Elise, we want to, kind of, pull the curtain back for our viewers who may have sensed a certain unsettledness about this show, and that's because our first guest, who we booked yesterday, was to be the ambassador from Israel to the U.S., followed by the Palestinian representative to the U.S.

And as things happen, I'm sitting out here and they say, no, we need to go to Jane Harman and Steve Hadley. You were back there. What was going on?

ELISE LABOTT, CNN SR. STATE DEPARTMENT PRODUCER: Well, Ambassador Oren was ready to come on the program, all in make-up, ready to get in the chair, and he got a call from, you know, headquarters, the prime minister's office, saying the prime minister wants to make a statement; he really wants to be the first person to respond.

I mean, it's reasonable. But presumably, they already knew that the ambassador was coming on this program, so they're obviously calibrating the statement after the president's speech very carefully.

But the ambassador did tell me that the prime minister appreciated the speech. And, you know, Candy, obviously, the '67 border that President Obama said we're not going to adhere to, there's a lot also in the speech for Israelis to be happy about today.

CROWLEY: So they seemed, in general, happy, even if they seemed to be stepping back just a little to want to take some time to, kind of, absorb it and then allow the headline to come from the prime minister.

LABOTT: Well, not only that, but the prime minister is going to be speaking to AIPAC tomorrow night. He's going to be speaking to the U.S. Congress. And so there was a lot in the president's speech talking about Israel's security guarantees. They really wanted a clear statement on Hamas. They wanted clear affirmation that the U.S. wasn't going to support the Palestinians seeking independence.

So I think they really want to carefully calibrate what they're saying and respond in a way that sticks true to Israel's principles but also gives the president some encouragement of what he said.

CROWLEY: And then we also had the situation where I was then told, no, the Palestinian representative isn't going to come on because, while we were waiting for the Israeli ambassador, and he didn't want to go first, the -- the Palestinian representative.

LABOTT: Well, the Palestinian didn't want the Israeli to have the last word, and isn't that always how it is? You know, it would be great if we could get them both on the same program together and they could talk. Maybe that's a first...

(LAUGHTER)

... stab at peace. But he came on. He really wanted to just lay out, again, Palestinians' clear principles without having a back and forth with the Israelis on what the speech will be.

CROWLEY: Anyway, it made for a really interesting show.

(LAUGHTER)

(CROSSTALK)

CROWLEY: And it shows you why this is all so completely difficult all the time.

LABOTT: Exactly.

CROWLEY: This is just putting a show together, much less peace.

(LAUGHTER)

Thanks so much, Elise Labott.

Thanks for watching "State of the Union." I'm Candy Crowley in Washington.